How companies can leverage litigation to fund mergers and acquisitions
- John Harabedian
- Associate Investment Manager, Legal Counsel - United States
As they seek to fund mergers or acquisitions (“M&A”), many companies routinely overlook an existing asset that can help generate substantial capital to help pay M&A-related costs—their litigation portfolio.
The COVID-19 pandemic has caused an economic climate where companies are finding themselves in liquidity crunches. Many companies are having difficulty finding the free cash to operate their businesses, let alone finance an acquisition of another company. An acquiror can work with a litigation funder to solve this problem by monetizing a portfolio of its existing legal claims or those held by the target company. The capital raised can be applied to help finance the acquisition by either serving as the cash component of a traditional financing deal or, better yet, serving as the purchasing capital. In addition to utilizing litigation finance to come up with the cash needed to complete an acquisition, litigation finance can also be an attractive option for a company looking to acquire or merge with a target that has a potentially valuable piece or portfolio of litigation. If the type and strength of claims are suitable, Omni Bridgeway can purchase them from the target entity, thereby removing a rather opaque and difficult-to-value asset from the merger or acquisition transaction.
Companies, whether private or public, often take on significant debt from financial institutions to fund a merger or acquisition. This often results in an over-leveraged acquisition where the target company or merged entity struggles to survive because of the imposing ongoing debt obligation that consumes free cash. Although interest rates are currently low, traditional loans have debilitating covenants, i.e., financial operational metrics the company must meet or otherwise face default, and require large, ongoing recourse debt payments that require payment no matter how the company performs financially. As expected, these kinds of recourse debt obligations can cripple the newly acquired or merged company and inhibit its growth and ultimate survival. Even the most well-managed companies can fall victim post-merger to debt that overwhelms its cash flow.
A litigation financing arrangement can help allay these issues. Unlike a traditional bank loan, dispute finance is non-recourse, which means the funder receives a return on its investment only if a case is successful. In exchange for capital to monetize the litigation, the funder usually receives a multiple of its initial investment based upon the recovery from a successful court or arbitral judgment or settlement. If a case is unsuccessful, the funder receives nothing. For the company, this can result in a multi-million-dollar cash inflow to use for an acquisition—or any business purpose—while retaining its ability to collect a substantial recovery should the case generate a large judgment or settlement.
To learn more about Omni Bridgeway’s litigation funding capabilities, visit our Company Insights. While there, explore our recent podcasts, blog posts, and videos. Or contact us for a consultation to learn more about the ways we can help you pursue meritorious claims.